Goodbye Caracas

What does China do when its business operations in main operating countries becomes unprofitable?

The answer to this question is China’s creation of several business connections with continents like Africa and South America in recent years.

China imported oil in 2015 at a total cost of 134.3 billion dollars. 10% of oil imports came from South America: China bought oil from South American countries at $13.6 billion that year. Part of the payment loaned from Beijing was to local governments, and three South American countries were a major focus of these loans: Brazil (70% of the loans), Venezuela and Ecuador.

China’s attention to South America, aside from its richness in natural resources, is also related to the preference of the Chinese government of signing contracts between governments. The Chinese decided that the leadership of many South American governments coincides with their own interests. However, what needs to be done when the profits of these loans decease and the business interface stops working? China’s response to the crisis in Venezuela can give us a peek the Chinese management decisions in situations such as this.

Venezuela faced political instability, lower oil prices, unbalanced payments, and long-standing socialist leadership which devastated their country in recent years. Inflation which started in 2016 raised by 720 percent, and unbelievably raised to 2,200 percent in the last year. In 2016 the economy contracted by ten percent, and this year has already contracted by another 4.5 percent. The country’s opposition threatens to overthrow the present president, Nicolas Maduro – a former bus driver who inherited the populist Hugo Chavez after his death from cancer in March 2013. The economic crisis and the threat to replace Maduro led China to calculate a new business path, first by asking whether the next government will be friendly to their interests or not. It seems that the answer was “maybe.”  In 2016, the government of China announced they would cease issuing new loans, but Beijing gave another chance to Caracas. Compared to the past, $5 billion in 2015 and $4 billion in 2014, China lent Venezuela only $2.2 billion in 2016. China clearly was not as eager as before to do business with Venezuela, despite the fact it holds the largest proven oil reserves in the world.

How does China see the global economic arena? The fear of China “conquering” the world through economic investments is mistaken. China’s reaction to Venezuela reveals its intentions for the relationship with countries to be primarily focused on economic relations. If China intended to “take control” over countries, they would have continued to give money to Maduro leadership so he could win the hearts of the people through economic improvements or by using weapons against the opposition, which, as we seen, the Chinese leadership chose not to do, and probably wouldn’t chose otherwise in the future. This provides insight to the thinking of the Chinese.

Beijing is willing to do business if it is profitable and unlikely to bring about losses.